“Bad News for ‘Cash Out’ Refinancings,” Chris Combs, Combs Law Group

I received another important email from the Combs Law Group. (You too can subscribe to their “E-Bulletins” on their website.)

[Note: I can’t find this article on the the Combs Law Group website so I’ll just post the whole article here. I would prefer to blurb the article here and link to the full article on their website.]

On second look, I’m not sure how important this is. I see this court decision was for a “judicial court-ordered foreclosure” but only a tiny percentage of foreclosures in Arizona are judicial foreclosures — in Arizona over 99% of foreclosures are non-judicial foreclosures, that is, Trustee Sales. Does this decision somehow impact cash out refinancings that were later foreclosed on via Trustee Sales? I don’t know.

Bad News for “Cash Out” Refinancings

by: Chris Combs, Esq.

During the real estate boom of the mid 2000’s there was massive appreciation in the value of homes in Arizona. Many borrowers refinanced the loans used to purchase their homes, and took “cash out” at the time of refinancing. For example, a homeowner purchased the home in 2003 with a loan of $100,000, refinanced the home in 2005 with a new $250,000 loan, and took “cash out” of $150,000. The homeowner then used this $150,000 “cash out” to buy stocks and bonds, to purchase a recreational vehicle, or even to go to Las Vegas. The question is and has been for many years: Can the lender collect this $150,000 “cash out” from the homeowner?

On March 20, 2012, the Arizona Court of Appeals basically answered “yes” to this question. See Helvetica Servicing, Inc. v. Pasquan, 1CA-CV 10-0418 (decided March 20, 2012). This Helvetica decision involved a lender’s claim for a deficiency after a judicial court-ordered foreclosure of a loan. Note: More then 99% of foreclosures in Arizona are non-judicial, i.e., trustee’s sales. Unlike judicial court-ordered foreclosures which do allow a deficiency claim after foreclosure of a loan not used to purchase the home, there can never be a deficiency after foreclosure by a trustee’s sale of any loan secured by a home.

In this Helvetica decision the Arizona Court of Appeals ruled that the lender could pursue a deficiency action for the “cash out” refinancing after a judicial court-ordered foreclosure. The Arizona Court of Appeals reasoned that sound public policy should not allow a borrower to protect the “cash out” when refinancing the original loan.

In other words, in the example above, if the borrower did not refinance the original $100,000 loan, but took out a $150,000 home equity line of credit (“HELOC”), the lender could bring a collection action against the borrower for this $150,000 HELOC. The Arizona Court of Appeals reasoned that there should be no legal distinction between the borrower’s liability for this $150,000 whether a “cash out” refinancing or a HELOC. Therefore, unless this Helvetica decision is overruled by the Arizona Supreme Court, the lender should be able to sue the borrower in a collection action for the $150,000 “cash out” refinancing similar to the lender’s ability to sue the borrower in a collection action for a $150,000 HELOC.

The “bottom line” is that lenders have already occasionally filed collection actions against borrowers for the amount of the “cash out” refinancing, but in light of this Helvetica decision there should be many more collection actions by lenders against borrowers for “cash out” taken when refinancing.

Finally, the Helvetica decision also ruled that, one, a construction loan used to build a home is generally protected as a purchase money loan, and, two, that a refinancing of the original loan with a different lender is also protected.
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